Chad Mulvany

Few things in Washington are certain. However, as healthcare payment reform moves from policy debate to legislative drafting, a measure to reduce preventable Medicare readmissions looks certain to make it into the final bills considered by both House and Senate.

Many policy analysts say that this area is where the real healthcare savings are. But what can hospital finance professionals do to eliminate preventable readmissions?

This challenge is one of the thorniest facing hospitals today. Providers embrace the moral imperative of this effort, but prevailing financial incentives and conventional thinking across the healthcare system only provide disincentives to action, while identifying and avoiding truly preventable readmissions is made difficult by the multitude of factors, including a patient's health prior to admission, the quality of transitional care a patient receives, and a broad spectrum of socioeconomic factors. 

Despite the challenges, hospitals will need to partner with other providers to solve this problem. Such coordinated action will help all parties to manage the financial changes that reform will bring and to improve the health of their communities. The importance of such action by providers was moved up a notch on July 9, when readmissions rates were added to the quality measures reported publicly on the Centers for Medicare & Medicaid Services (CMS) Hospital Compare web site (www.hospitalcompare.hhs.gov).

Within hospitals, solving the preventable readmissions quandary will require a cross-functional effort that includes hospital finance professionals. To be able to contribute to a clinically and economically effective solution, finance professionals need to understand the problem, quantify its impact on the organization, and help explore potential solutions.

A Complex Problem

The overall readmissions problem is well documented. In testimony last year before the Senate Finance Committee, the Medicare Payment Advisory Commission (MedPAC) reported that readmissions cost Medicare $15 billion in 2005.a Various studies estimate that between 18 percent and 20 percent of Medicare patients are readmitted to hospitals within 30 days of discharge.b The CMS reports that three diagnoses-congestive heart failure, acute myocardial infarction, and pneumonia-account for more than half of re-admitted cases.c The factors that contribute to overall readmissions are easily identifiable; they include patient health, socioeconomic status, and the quality of transitional planning and postdischarge care. However, the factors underlying preventable readmissions are less clear.

MedPAC estimates that Medicare spent $12 billion in 2005 on potentially preventable readmissions. Yet at this point, despite numerous academic studies, no exact criteria exist for identifying preventable readmissions. What does exist is widespread consensus that improving the quality of transitional planning and postdischarge care will reduce the risk. A New England Journal of Medicine study found that more than half of nonsurgical patients readmitted within 30 days did not have a follow-up visit with a physician.d This is where hospital finance professionals, clinicians, and other care providers can make a difference.

What Hospital Finance Professionals Can Do

Hospital finance professionals can play two key roles on cross-functional teams: They can use their analytical skills to quantify the problem and assist in diagnosing its causes, and they can work with clinical professionals and strategic planning to craft economically feasible solutions.

Quantify the impact and identifying causes. Hospital finance professionals' first priority is to identify the financial impact of readmitted Medicare patients. In its March 2009 report to Congress, MedPAC estimates that U.S. hospitals' average Medicare margin for 2009 will be -6.9 percent.e The margin on readmitted patients is likely to be far worse given most are sicker than average and enter the hospital through the emergency department.

Hospital finance professionals will need to perform a comprehensive analysis to assess the impact of proposed legislation beyond this marginal cost and gain a clear picture of the financial challenges that preventable readmissions present.

Finance professionals and their cross-functional teammates then should seek to identify potential root causes of preventable readmissions specific to their organizations. For this purpose, the widest possible range of variables should be included in patient-level reports generated to determine the financial impact and used to identify patterns in patient readmissions.

High-level analysis, adjusted for risk, can identify areas for concentration. For example, a particular discharging unit, zip code, or physician showing a higher-than-expected readmission rate would be a good target for specific interventions. A more detailed secondary analysis using "audits" based on statistically valid samples also will be needed to identify issues related to scheduling follow-up appointments and problems with specific home health agencies and nursing facilities.

These are not one-time analyses. Hospitals will need to rerun them routinely to monitor the success of interventions and identify new problem areas. By proactively identifying potential root causes of readmissions, the project team can concentrate on interventions that are best suited to a hospital's specific set of challenges.

Develop solutions. Hospital finance professionals can help develop solutions to the preventable readmissions problem in two important ways: by working with clinical staff to identify and evaluate potential ways to reduce preventable readmissions, and by working with strategic planning to determine how volume changes will affect long-term strategies and capital plans.

Finance can help clinical and operational professionals identify solutions by providing the root cause results discussed above and scanning the environment for solutions that fit a facility's specific problems. Having such data will allow the hospital to:

  • Standardize discharge planning processes across the organization and incorporate emerging best practices
  • Allocate its community outreach resources and work effectively with other community charities and social safety net programs to address socioeconomic issues that contribute to readmissions
  • Work with high-volume readmitting physicians to improve communication, care coordination, and follow-up appointment scheduling

In addition to exploring interventions to reduce readmissions, finance professionals will need to play a more traditional role, determining how changes in volume will affect long-range plans.

The effect of reduced readmissions on hospitals depends heavily on whether the hospital can replace the prevented readmissions and, if so, with what types of cases. If a hospital cannot replace all of its prevented readmissions, it will need to rethink capital plans to account for a decrease in volume. In some situations, decreased readmissions may require the hospital to delay or cancel capacity expansion projects.

If the hospital cannot anticipate any replacement volume at all, the analysis becomes considerably more complicated. In this instance, all options should be on the table, including:

  • Expanding traditional services with growth potential
  • Examining new opportunities that arise from shifting business models due to reform
  • Converting closed units into medical office or retail space
  • Mothballing units, as was done in the 1990s

Volume changes will occur gradually, with the maximum potential decreases not realized for several years. However, providers should begin planning for them now. Given the high fixed costs associated with providing inpatient hospital care, it will take some time to reallocate resources without disrupting cash flow or operations.

Closing Thoughts

Hospitals need to act now against preventable readmissions. This will be the first of many anticipated payment reforms implemented. Many of these reforms will require closer integration with other providers to coordinate care and manage transitions.f Experience gained working with other providers to reduce preventable readmissions will be the foundation on which hospitals can begin to coordinate their response to more complex reforms to come, such as payment bundling and accountable care organizations.


a. To read the Sept. 16, 2008, testimony, go to www.medpac.gov and scroll to Search Documents; for Document type, select Congressional testimony, and for Year published, select 2008.
b. See, for example, Epstein, A.M.,  "Revisiting Readmissions-Changing the Incentives for Shared Accountability," The New England Journal of Medicine, April 2, 2009, content.nejm.org/cgi/content/full/360/14/1457.
c.  See the June 2, 2009, presentation by Barry M. Straube, "Preventable Hospital Admissions:  CMS Taking Action," www.ehcca.com/presentations/readsummit1/straube_2.pdf.
d.  Jencks, S.F., Williams, M.V., and Coleman, E.A., "Rehospitalizations Among Patients in the Medicare Fee-for-Service Program," The New England Journal of Medicine, April 2, 2009,  content.nejm.org/cgi/content/full/360/14/1418.
e. To read the MedPAC report, go to www.medpac.gov/documents/Mar09_EntireReport.pdf.
f.  For more details, read HFMA's whitepaper Healthcare Payment Reform: A Call to Action.


Chad Mulvany is a technical manager in HFMA's Washington, D.C., office, and a member of HFMA's Virginia Chapter.


Variables for Understanding Why Readmissions Occur

Hospitals should consider including the following variables, among others, in patient-level reports used to understanding the root causes of patient readmissions:

  • Patient zip code (proxy for economic status)
  • Secondary payer (proxy for economic status)
  • Case mix index
  • Medicare severity-adjusted diagnosis-related groups
  • Admission source
  • Admission diagnosis
  • Readmission diagnosis
  • Discharge disposition
  • Discharge date and day
  • Physician (admitting, discharging, and primary)
  • Discharging unit
  • Discharge coordinator

Web Resources

The following projects provide good resources for gaining insight into the current thinking and best practice related to preventable readmissions.

Medicare Care Transitions Project. A national demonstration project active in 14 localities that is testing different community-based methods of reducing readmissions. For additional information on the localities and methods, go to www.cfmc.org/caretransitions.

The University of Pennsylvania's Transitional Care Model. This model provides comprehensive in-hospital planning and home follow-up for chronically ill high-risk older adults hospitalized for common medical and surgical conditions. For more details, go to www.transitionalcare.info.

The Care Transitions Program. During a four-week program, patients with complex care needs receive specific tools, are supported by a Transition CoachTM, and learn self-management skills to ensure their needs are met during the transition from hospital to home. For more details, go to www.caretransitions.org/overview.asp.

Publication Date: Tuesday, September 01, 2009

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